ROI Last Year Current Year Newspaper 10% 11% Brewing 19% 17% Cable TV 3% 5% Profit Margin
Question:
ROI | Last Year | Current Year |
Newspaper | 10% | 11% |
Brewing | 19% | 17% |
Cable TV | 3% | 5% |
Profit Margin | Last Year | Current Year |
Newspaper | 17% | 21% |
Brewing | 20% | 24% |
Cable TV | 11% | 41% |
Asset Turnover | Last Year | Current Year |
Newspaper | 0.588 | 0.531 |
Brewing | 0.950 | 0.695 |
Cable TV | 0.270 | 0.121 |
Discuss and comment on the relative performance of the three divisions.
Each managing director receives an annual cash bonus based on achieving the target divisional ROI. The company defines ROI as operating profit, before interest and taxes, divided by divisional assets (measured at original cost less accumulated depreciation). Senior managers are each eligible for a cash bonus of $60 000 if they reach their divisional ROI target. If performance is above target, share options are awarded at the rate of 10 000 shares for every additional point over target. Thus, if the ROI target is 13 per cent and the division achieves 15 per cent, the manager would be awarded 20 000 share options. These options are at the prevailing market price on the last day of the financial year, and must be taken up within two years of the award. During the past year, the market price of the company's shares increased from $4 to $6. If the ROI target is not reached, there are no bonuses or share options, and the managing director has to provide convincing reasons for the poor performance. As a consequence of the performance measurement and reward system, the managing directors are highly motivated to achieve, and exceed, their ROI targets.
Target ROI | |
Last Year | Current Year |
10% | 10% |
18% | 16% |
2% | 3% |
Calculate the bonus that each managing director would earn in the two years. Explain why David Smith is reluctant to invest in the new brewing equipment. Provide calculations to support your answer.
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill